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RI bond market remains attractive but risks loom
Bank Mandiri analysts noted that lower benchmark rates globally, as well as fresh liquidity from global investors and Bank Indonesia’s (BI) quantitative easing would continue to support the bond market.
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ndonesia’s bond market is likely to remain among the most attractive in the developing world, but as the risks of COVID-19 continue to rise, a slow economic recovery and depressed state revenue weigh on fiscal capability and may trigger capital outflows, market experts say.
As of Nov. 17, the bond market has grown 11.6 percent year-to-date (ytd), its best performance so far and an outperformance of the stock market, analysts at Bank Mandiri wrote in a November research note. The 10-year government bond yield increased 1.7 basis points (bps) to 6.19 percent on Friday, down by 87.2 bps ytd.
Bank Mandiri analysts noted that lower benchmark rates globally, fresh liquidity from global investors and Bank Indonesia’s (BI) quantitative easing would continue to support the bond market.
“Although the 10-year government bond yield has fallen, the real yield is still higher than the long-term average over the last 10 years and is offering the highest yields compared to other emerging countries,” analysts at Bank Mandiri wrote in the note.
“We also believe lower interest rates and flush liquidity globally and domestically may persist next year.”
The analysts expected 10-year government bond yield to stay between 6 and 6.25 percent this year and fall next year to a range of 5.7 to 6 percent.
However, the continuing rise in COVID-19 cases and slow vaccine development could dampen the outlook as they could lower fiscal space and trigger the reemergence of risk avoidance, they warned.
Indonesia has fallen into a recession for the first time in two decades as the government struggles to contain the COVID-19 outbreak and its economic fallout.
Indonesia set one-day COVID-19 infection and fatality records on Friday, with 5,828 new cases and 169 deaths recorded in 24 hours. The country recently passed half a million cumulative COVID-19 cases.
Indonesia’s rupiah-denominated bond market posted quarterly growth of 9.9 percent at the end of September, the second highest in emerging East Asia, to reach US$264.8 billion, according to the quarterly issue of the Asian Development Bank’s (ADB) Asia Bond Monitor.
“This stemmed largely from increases in the stock of government bonds, particularly treasury bills and treasury bonds, due to the government’s increased borrowing needs to support stimulus measures and recovery efforts amid the COVID-19 pandemic,” the ADB said.
The total stock of government bonds grew 10.9 percent quarter-on-quarter in the third quarter this year, reaching $235.2 billion, the ADB also stated.
The government issued Rp 444 trillion ($31.52 billion) worth of bonds in the third quarter this year, up from Rp 346.5 trillion in the second quarter, as the pandemic necessitated government borrowing amid plunging state revenue and rising spending needs.
As of October, the government has issued Rp 943.5 trillion worth of debt, up 143.8 percent year-on-year, and it is likely to issue another Rp 230.2 trillion throughout the remainder of the year, bringing the debt-to-gross domestic product ratio to 36 percent.
The central bank, meanwhile, has bought Rp 494.5 trillion worth of government debt under two agreements with the Finance Ministry, including the burden sharing agreement.
Concurring with the Bank Mandiri analysts, the ADB warned about the risks that COVID-19 presented for the bond market.
“COVID-19 remains the biggest downside risk to emerging East Asia’s bond market and the global outlook, particularly the possibility of new waves of positive cases and related lockdowns and other restrictions on economic activities,” it said.
“Ongoing trade tensions between the PRC [China] and the United States are an additional risk.”
Separately, credit ratings agency Moody’s Investor Service said a higher debt burden as a result of coronavirus-related fiscal spending, as well as worsening debt affordability, had weakened the country fiscally. Furthermore, foreign-currency denominated funding, which comprised 40 percent of national debt, left the country vulnerable to exchange rate risk.
Some 26 percent of government debt, or Rp 968.5 trillion, was held by foreign entities as of Nov. 25.
“Substantial foreign ownership of the government's local currency debt stock also reflects the shallowness of domestic capital markets,” Moody’s analysts wrote in a note.
“However, investor appetite for government debt has been resilient, and Indonesia has been able to issue debt in international markets even during periods of heightened global volatility.”
Risks, however, loom for Indonesia’s credit rating. The main risks stem from a prolonged slowdown in growth, political challenges to economic reforms and potential deterioration in the country’s external position through currency depreciation or capital outflows.
